Question

Year WN-O Cash Flow -$7,700 4,000 5,900 2,100 a. What is the profitability index for the cash flows if the relevant discount rate is 8 percent? b. What is the profitability index for the cash flows if the relevant discount rate is 19 percent?

Answer 1

Ans 1) a. 1.35

b. 1.14

c. 1.06

Year	Project Cash Flows (i)	DF@ 8%	DF@ 8% (ii)	PV of Project ( (i) * (ii) )	DF@ 19% (iii)	PV of Project ( (i) * (iii) )	DF@ 24% (iv)	PV of Project A ( (i) * (iv) )
1	4000	1/((1+8%)^1)	0.926	3,703.70	0.840	3,361.34	0.806	3,225.81
2	5900	1/((1+8%)^2)	0.857	5,058.30	0.706	4,166.37	0.650	3,837.15
3	2100	1/((1+8%)^3)	0.794	1,667.05	0.593	1,246.17	0.524	1,101.42
		NPV		10,429.05	NPV	8,773.89	NPV	8,164.38
	Total of PV of Cash Inflows			10429.05		8773.89		8164.38
	Cash Outflows			7700		7700		7700
	Profitability Index =			1.35		1.14		1.06
Present value of cash Inflow / Initial Investment (Cash Outflows)				(10429.05 / 7700)		(8773.89/7700)		(8164.38/7700)